1. Foreign Direct Investment in India: The Legal Regime
Nusrat Hassan
Managing Partner, DH Law Associates

2. Liberalization Phase in India
As a result of the various policy initiatives taken and under way, India has become one of the most attractive destinations for foreign investment.
Since 1991 Indian Government’s liberalization and economic reforms programme and Industrial Policy reforms have reduced the industrial licensing requirements, removed restrictions on investment and expansion and facilitated easy access to foreign technology and foreign direct investment.
India is now ushering in the second generation of reforms aimed at further and faster integration of Indian economy with the global economy.

3. Growth of Industry and Infrastructure

4. Growth of Industry and Infrastructure

5. Growth of Industry and Infrastructure

6. Growth of Industry and Infrastructure

7. India-Promising place to invest
Economy growing at %
Burgeoning middle class -Asian Development Bank Report Forecast-the number to grow over 600 million by 2020 and to over 1 billion by 2030
Investor friendly investment policy
Vibrant democracy, political stability, independent judiciary, access to sophisticated legal community, mature regulators, robust banking and financial markets as well as availability of a large pool of technical people.
High activity on cross border deals both inbound and outbound investment
Significant deals seen in the last few years Vodafone-Hutchinson deal, TATA acquiring iconic British carmaker Jaguar Land Rover and steel behemoth Corus in Europe, acquisition of a majority stake in domestic steel firm Uttam Galva Lakshmi Mittal-led ArcelorMittal and many such others.

8. Introduction to FEMA
Foreign investment is of two kinds – (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment.
Foreign Direct Investment (FDI) in India is governed by the FDI Policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA), 1999.
FDI means investment by non-resident entity/person resident outside India in the capital of the Indian company.
FDI by non-resident in resident entities through transfer or issue of security to person resident outside India is a ‘Capital account transaction’ and is regulated under FEMA, 1999 and its regulations.
DIPP makes policy pronouncements on FDI through Press Notes/ Press Releases.

9. Entry Routes for Investment
Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through two routes; the Automatic Route and the Government Route.
Automatic Route: The non-resident investor or the Indian company does not require any approval from the RBI or Government of India for the investment.
Government Route: Prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required.

10. Entry Routes for Investment-Contdd
Proposals for foreign investment under Government route as laid down in the FDI policy from time to time, are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance.
Guidelines for establishment of Indian companies / transfer of ownership or control of Indian companies, from resident Indian citizens to non-resident entities, in sectors with caps
Sectorial Caps on Investments: Investments can be made by non-residents in the capital of a resident entity only to the extent of the percentage of the total capital as provided/permitted in the FDI policy. Thus while investment are prohibited in some sectors/activities, there are restrictions/conditions/caps on the investment in certain other sector/activities.

11. Entry Routes for Investment
Investing in India
Automatic Route
Pricing
General rule Inform RBI within 30 days of inflow/issue of shares
Approval Route
By exception approval of the FIPB needed. Decision generally within 4-6 weeks

12. Entry through Automatic Route
All items/activities for FDI investment up to 100% fall under the Automatic Route except the following:
All proposals that require an Industrial Licence.
All proposals relating to acquisition of existing shares in an existing Indian Company by a foreign investor.
All proposals falling outside notified sectoral policy/ caps or under sectors in which FDI is not permitted.

13. Entry through Approval Route
All other cases where the automatic approval route is not applicable, prior specific approval from the Government of India is necessary.
Application is to be made to Foreign Investment Promotion Board (FIPB) and Secretariat of Industrial Assistance (SIA) for obtaining the approval.
For all activities, which are not covered under the Automatic Route
Published Transparent Guidelines vs. Earlier Case by Case Approach
Downstream Investment

14. Entry Conditions
Investments can be permitted to be made by non-residents in the capital of a resident entity in certain sectors/activity with entry conditions.
These entry conditions would be applicable for investment only by non-resident entities. Such conditions may include norms for minimum capitalization, lock-in period, etc.
Besides the entry conditions on foreign investment, the investment/investors need to conform to all relevant sectoral laws, regulations and rules.
The national security/internal security related conditions as contained in relevant statutes or notifications of the Government will also have to be complied with.
The State Governments/Union Territories have regulations in relation to the subjects in their legislative domain. These regulations also have to be met/complied with.

15. The Entry Strategy Forms in which Business can be conducted in India
Wholly owned subsidiary
Joint Venture Company
Branch Office
Project Office
India Presence: Liaison Office
Type of Instrument that can be issued: equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares

16. The Entry Strategy Price/ conversion formula of capital instruments:
Old Policy: The pricing of the capital instruments should be decided/determined upfront at the time of issue of the instruments.
New Policy: The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.

17. Vehicles For Doing Business
Project Office
Specific approval from the RBI is required for setting up a project office.
Such approval is generally accorded in respect of projects approved by appropriate authorities or where the projects are financed by Indian bank/financial Institution or multilateral/ bilateral international financial institutions.
Project Office is in the nature of a Branch Office set up for a particular project.

18. Vehicles For Doing Business
Branch Office
Prior approval of the Reserve Bank of India.
Represent the business interest of foreign company
Permissible activities for a Branch Office
Issue: Project/ Branch Office – Permanent Establishment

19. Vehicles For Doing Business
Liaison Office / Representative Office
A person resident outside India (including companies) may open a liaison office only with the prior approval of the Reserve Bank of India.
Permitted activities of a liaison office:
Promotion of business interest; spreading awareness of company’s products; explore opportunities; work as channel of communication etc.
Cannot carry on any commercial, trading or industrial activity or earn any income in India
Is required to maintain itself out of inward remittances received from abroad through normal banking channels.

20. Wholly Owned Subsidiary
A foreign company can commence operations in India through incorporation of a company under the provisions of the Indian Companies Act, 1956 depending on a business plan of the foreign investor, prevailing investment policies of the Government and receipt of requisite approvals.
It will be subject to same Indian laws and regulations as applicable to other domestic Indian Companies.

21. Wholly Owned Subsidiary
The Companies Act, 1956, provides for incorporating of both Private and Public Companies with or without limited liability. The liability maybe limited by shares or by guarantee.
In the case of a company limited by shares, the personal liability of the members is limited up to the amount unpaid on their shares. In a company limited by guarantee the members undertake to meet their liabilities up to an amount already agreed upon at the time of winding up of the company.

22. Joint Venture
Foreign companies can set up the operations in India by forging strategic alliances with Indian partners.
Vital Considerations
Clearly defined agreement
Terms of the Shareholders’ Agreement should be reflected in the Articles of the Company.
Share Transfer Restriction in a Public Limited Company
Disproportionate voting Rights: Veto
Non-compete

23. Joint Venture
Setting up of operations through a joint venture may entail the following advantages for foreign investors
Established distribution/marketing set up of the Indian partner.
Available financial resource of the Indian partner.
Established contracts of the Indian partner, which help smoothen the process of setting up of operations.

24. Previous Venture in India
Press Note 18 of 1998 operated to restrict foreign investments and required foreign investors to obtain prior Government approval to invest where they had a previous joint venture in India.
The next major round of dilution came in 2005 in the form of a cut-off date which provided that the condition henceforth applied only to “existing ventures” as of January 12, 2005 (the date of the policy revision) and that it was not applicable to ventures that were established thereafter.
Recently, the condition has been completely abolished in new policy.

25. Previous Venture in India
Foreign investors are no longer required to obtain Government approval even if they had previous ventures in India so long as the new investment otherwise falls within the automatic route.
This truly levels the playing field. It is perhaps the most significant and likely impactful change introduced recently.

26. Issue and Transfer of Shares
The capital instruments should be issued within 180 days from the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor. In case, the capital instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be.
Non-compliance with the above provision would be reckoned as a contravention under FEMA and would attract penal provisions. In exceptional cases, refund of the amount of 2 Review of FDI policy to allow FDI in LLPs is under consideration of the Government.

27. Issue and Transfer of Shares
Issue price of shares
Transfer of shares and convertible debentures
Prior permission of RBI in certain cases for transfer of capital instruments :
Conversion of ECB/Lumpsum Fee/Royalty into Equity
ISSUE OF INSTRUMENTS
Issue of Rights/Bonus Share
Additional allocation of rights share by residents to non-residents
Acquisition of shares under Scheme of Merger/Demerger/Amalgamation
Issue of shares under Employees Stock Option Scheme (ESOPs)
Share Swap

28. Guidelines for calculation of total foreign investment
Counting the Direct Foreign Investment: All investment directly by a non-resident entity into the Indian company would be counted towards foreign investment.
Counting of indirect foreign Investment: The foreign investment through the investing Indian company would not be considered for calculation of the indirect foreign investment in case of Indian companies which are ‘owned and controlled’ by resident Indian citizens and/or Indian Companies which are owned and controlled by resident Indian citizens .

29. GDR, ADR, FCCB Other modes of Foreign Direct Investment
Indian Companies allowed to raise equity capital in the international market through the issue of GDRs/ ADRs/FCCBs.
No ceiling on investment
No end-use restrictions on GDR/ ADR/ FCCB issue proceeds
Except Investment in real estate and Stock markets
Government clearance required when sectoral cap is exceeded, or for a project not falling under Automatic Route.
25% of the FCCB proceeds can be used for general corporate restructuring.

30. Foreign Technology Collaboration
Foreign technology collaborations are permitted either through the automatic route or by the Government.
To all industries for foreign technology collaboration agreements, irrespective of the extent of foreign equity in the shareholding, subject to:
No restriction on the duration of the royalty payments
All the payments for royalty, lumpsum fee for transfer of technology and payment for use of trademarks/brand name fall under automatic approval route, without any ceiling on the percentage. No permission of Government of India will is necessary. However, all such payments will be subject to Foreign Exchange Management (Current Account Transfer) Rules, 2000.

31. QnA

32. THANK YOU